Notes from the 2018 Berkshire Meeting

May 9, 2018 by Jon

The Q&A session at the BRK meeting can be repetitive if you’ve seen it a few times. The questions are often the same. The answers are too, especially those pertaining to failure, mistakes, behavior, investment philosophy, and the “secret sauce” to Buffett’s investing success.

It can be a little monotonous and boring hearing the same thing over and over again. There has to be something more, right?

Each year, I try to mix it up, but the reality is timeless investing advice is rather mundane and repetitive.

That’s the brilliance of it.

Investing success is largely a boring endeavor achieved over decades. Buffett’s and Munger’s answers are the same because the advice hasn’t changed in a ridiculously long time. It’s not meant to be flashy. So don’t over think it.

Let’s dive into the notes.

On the overriding question.

…just remember that the overriding question is, “How is American business going to do over your investing lifetime?” — Buffett

Too many investors get caught up in the daily noise and ask the wrong questions. What will the market do this year? What about rising interest rates? Yield curve? Inflation? Taxes? The economy? Unemployment rate? Slow GDP growth? A weaker dollar? Tariffs? But what about the elections coming up? How should I position my portfolio for all that?

Buffett’s question is the one that matters.

Owning a profitable, growing business is one of the few paths to wealth. It’s something anyone can do today with a meager amount of savings. You can start a business or buy one (Buffett often refers to farms or apartment buildings). Or you can take a simpler approach by buying a portion of a business through the stock market.

Owning a decently profitable business over a long period of time will compound your net worth. And you can diversify into multiple businesses (via an index fund) to increase your chance of success. A savvy investor might try to buy shares of businesses for less than they’re worth.

In any case, the only question business owners (investors) need ask is Buffett’s “overriding question.” How will the business(es) do over the next 20 or 30 years?

On knowing what you don’t know and not being afraid to admit it (these were answers to several Q’s along the same line).

What counts is having a philosophy that you’ve — that you stick with, that you understand why you’re in it, and then you forget about doing things that you don’t know how to do. — Buffett

That’s too tough. — Munger

The answer is, I don’t know. — Buffett

There is no penalty in investing if you don’t swing at a ball that’s in the strike zone, as long as you swing at something at some point, then you know, eventually that you find the pitches you like. And that’s the way we’ll continue to do it. We’ll try to stay within our circle of competence. — Buffett

All of this falls within knowing what you know and don’t know. Buffett and Munger could easily sit on stage trying to be an expert in everything or they could be honest about they’re intellectual limitations.

Besides, an incredibly easy way to lose money is to focus on investments you have no clue about. Investing comes with enough risk. Why compound it by making it harder on yourself. Ignorance is a stupid reason to invest in anything.

On the ability to change your minds.

Munger: Well, as long as the existing system continues to work as well as it has, why would we change it? … And if conditions change, why, we’re capable of changing our minds, if the facts change.
Buffett: Yeah, and we’ve done that several times.
Munger: Yes.
Buffett: Yeah.
Munger: Although, I must say, it’s a little hard.
Buffett: He always brings me back to earth.

This was just a great exchange on making unnecessary changes but also being open-minded enough to recognize when it’s needed and the difficulty in acting on it.

On being prepared for opportunities and willing to act.

Part of the Berkshire secret is that when there’s nothing to do, Warren is very good at doing nothing. — Munger

So every now and then, something really strange happens in markets and the trick is to not only be prepared but to take action when it happens. — Buffett

Buffett’s superpower is his ability to sit on his hands when there’s nothing to do, then act swiftly when a great opportunity presents itself. The only way that works is to have capital — cash — available and accept the tradeoff of earning meager returns on that cash, while missing out on what the market offers today, for a potentially high payoff in the future.

None of that — the doing nothing, the missing out, the acting — is easy.

The second quote is based on his example of the 14% yields on Treasury bonds in the early 80s. After the fact it all seems easy enough. But at the time, how many people filled their portfolio with 30 year Treasuries paying double-digit yields? Not many.

Higher inflation fear was a big deterrent back then. Who wants to own a 30-year bond paying 13% if they think inflation might exceed that or stay high for years? Not many. Not many people considered at the time that inflation was closer to its peak. Most people were waiting for a clearer picture of the direction of inflation before acting.

That’s Buffett’s point. By waiting, they missed the best opportunity. Preparation is pointless without the ability to act.

On share buybacks.

Well, just put it this way. If Andrew and Charlie and I were partners in a business that was worth $3 million so each of us had a million dollar interest in it, if Andrew offered to sell out his one-third interest at 800,000 and we had the money around, we’d jump at the chance to buy him out. I mean, it’s so simple.

But people get all lost — and if he’d wanted a million-two for it, we wouldn’t pay it to him.

It’s very simple math, but it gets lost in all these discussions. And of course, like I say, Tim Cook could do simple math. And he could probably do very complicated math, too. So, we very much approve of them repurchasing shares. — Buffett

***

I think, generally speaking in America, when companies go out hell-bent to buy other companies, they do — they’re worth less after the transaction is made than they were before… I don’t think the world’s that easy. I think that the reason these companies are buying their stock is that they’re smart enough to know that it’s better for them than anything else. — Munger

There’s a lot of unnecessary controversy around share buybacks lately. The recent argument against it is, mostly, political nonsense.

As Buffett explains, companies buying back shares at cheap to fair prices benefits the remaining shareholders in the long run. A reason to complain about buybacks is that the company is overpaying for the shares and/or doing it to offset share dilution from stock options.

But most controversies like this get argued in a vacuum. In reality, companies have multiple options to direct capital and they typically use more than one at any given time. And each one has limits where using additional capital becomes wasteful or destructive, to the detriment of shareholders.

On speculation.

I think that anytime you buy a nonproductive asset you are counting on somebody else later on to buy a nonproductive asset because they think they can sell it to somebody for more money. And it’s been tried with tulips and it’s been tried. It’s been tried with various things over time. And it does come to a bad ending.

This was from a comment on cryptocurrencies but it applies to gold or coal or any other asset that produces no cash flows. The price is only driven by supply and demand.

By buying, you’re speculating that when you do eventually sell, demand will be high enough — the supply of greater fools will be high enough — for you sell it at a higher price. History shows that these things can get disproportionally out of whack, where demand creates more demand as people pile in, but it eventually comes crashing down due to a scarcity of buyers.

Of course, the benefit of productive assets — farms, apartment buildings, businesses — is that selling is not required to make a profit.

On boiling down an economic issue to a single variable.

It’s very, very, very difficult in economics to measure the impact of single variables. You cannot just do one thing in economics. People kind of learn that in physics and talk about butterflies in China and all that sort of thing. But the — every question you get in economics the next, any statement, you should say “and then what?”

This should be common sense, but it happens way too often. It goes back to the very first point above about asking the wrong questions. When investors or business news fixate on one thing, like rising interest rates, for example, it oversimplifies a complex issue. The first level takeaway is that it is that simple. It’s not.

On behavior over IQ.

If I could hire somebody among the top five graduates of number one, two or three of the business schools, and my choice was somebody that had — was bright — but had chapter eight of “The Intelligent Investor” absolutely — it just was natural to them — they had it in their bones, basically — I’d take the person from chapter eight.

This is not — what we do is not a complicated business. It’s got to be a disciplined business, but it is — it does not require a super IQ or anything of the sort.

A lot of investors focus all their attention on finding the right strategy or right stocks. They’d be much better off focusing on managing behavior. Buffett wrote the preface to the fourth revised edition of The Intelligent Investor and led it off with this:

To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework. You must supply the emotional discipline.

If you follow the behavioral and business principles that Graham advocates — and if you pay special attention to the invaluable advice in Chapters 8 and 20 — you will not get a poor result from your investments. (That represents more of an accomplishment than you might think.)

Incidentally, Chapter 8 is dedicated to not treating stocks as pieces of paper whose price quotes bounce around every day, but part ownership of businesses. It’s also where you’ll find Graham’s Parable of Mr. Market. Chapter 20 is dedicated to always leaving room for error with a margin of safety.

Quips

My theory, Warren, is if it can’t stand a little mismanagement, it’s no business. — Munger

If you’d bought gold at the time of Christ and you figured the compound rate on it, you know, it may be a couple tenths of 1 percent. — Buffett

I think the people who are professional traders that go into trading cryptocurrencies, it’s just disgusting. It’s like somebody else is trading turds and you decide, “I can’t be left out.” — Munger

If we’d been offered a chance to go into Coca-Cola right after it was invented, we probably would have said no. — Munger

Ben Graham recognized that the exact way he sought undervalued companies wouldn’t necessarily work for all times under all conditions. And that’s certainly the way it worked for us. — Munger

If you’re going to live a long time, you have to keep learning. What you formerly knew is never enough. So if you don’t learn to constantly revise your earlier conclusions and get better, you are — I always use the same metaphor. You’re like a one-legged man in an ass-kicking contest. — Munger

Whenever you hear a theory described as elegant, watch out. — Buffett

There’s an old saying that the past is a very strange country. People behave quite differently there. — Munger

We have a wonderful system. If one of us is stupid in some area, so is the other. — Munger